Bonds, stocks take breather after last week’s rally

Bonds, stocks take breather after last week’s rally

By Herbert Lash and Alun John

NEW YORK/LONDON (Reuters) -A gauge of global equity performance edged higher and Treasury yields rose on Monday as last week’s big rally in stocks and bonds on hopes of soon-to-come rate cuts faded a bit, with markets again assessing the uncertain outlook for growth and inflation.

The three main stock indices on Wall Street traded little changed, with major European equity indices lower. The yield on the benchmark 10-year Treasury note rose 8.1 basis points to 4.639% after falling about 29 basis points (bps) last week in the biggest weekly drop since March.

A benign U.S. payrolls report on Friday and upbeat productivity numbers suggested the American labor market was cooling enough for the Federal Reserve to halt the need for further rate increases.

But the drop in market yields is a double-edged sword as they could revive the credit market and spur economic growth, said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

“The markets are in wait-and-see mode,” Goldberg added, as traders assess whether the economy decelerates further or in fact proves to be more resilient than the Fed would like to see.

The U.S. central bank could be forced to raise rates to ensure the pace of inflation remains on a downward trajectory and does not bounce back, Goldberg said.

Futures now see the Fed’s overnight lending rate staying above 5% only through next June, and have priced in almost four 25 basis point rate cuts by the end of 2024, or double the most recent projections by policymakers.

MSCI’s gauge of stocks across the globe gained 0.40%, on track to its sixth consecutive session of gains, while the pan-European STOXX 600 index lost 0.10%.

On Wall Street, the Dow Jones Industrial Average rose 0.06%, the S&P 500 gained 0.14% and the Nasdaq Composite added 0.32%.

Markets also imply about an 80% probability the European Central Bank (ECB) will cut rates by April, while the Bank of England (BoE) is seen easing in August.

“We would want to add a note of caution – yes, we are in the camp that says the inflation outlook will allow rate cuts next year, but going to more-and-sooner cuts feels like the pendulum has gone a bit too far,” said Samy Chaar, chief economist at Lombard Odier. “We’ve seen this back and forth before, and I think it’s going to be the story for the coming quarters.”

Central bankers have their own chance to weigh in on this dovish outlook, with at least nine Fed members speaking this week, including Chair Jerome Powell. Also on the docket are speakers from the BoE and ECB.

An outlier is Australia’s central bank, which is considered likely to resume raising rates at a policy meeting on Tuesday as inflation there stays stubbornly high.

The Bank of Japan is also on the road to tightening, albeit at a glacial pace. The head of the central bank said on Monday it was closer to achieving its inflation target, but it was still not enough to end ultra-loose policy.

Hopes for lower borrowing costs overnight helped shares in Asia, which missed out on Friday’s rally that was inspired by the U.S. jobs data.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 2.1% on Monday.

South Korea stood out, climbing 5.66% as authorities re-imposed a ban on short-selling to mid-2024.

DOLLAR DROPS

Two-year Treasury yields, which reflect interest rate expectations, rose 5.9 bps to 4.891% after falling 18 bps last week. The 10-year German Bund’s yield, the euro zone benchmark, rose 8.9 bps to 2.726% after seven sessions of declines.

The recent retreat in Treasury yields pulled the rug out from under the dollar last week. The dollar index, a measure of the U.S. currency against six others, was steady at 105.07 after sliding 1.4% last week.

The euro was up 0.06% at $1.0736, near its highest in nearly two months after surging 1% on Friday. The dollar has even lost ground in recent sessions to the ailing yen to stand at 149.75 yen, some way from its recent top of 151.74. [FRX/]

The drop in the dollar and yields has helped underpin gold at $1,984 per ounce, down 0.4% on the day, as investors have cautiously turned back to riskier assets.

Oil prices rose, after shedding 6% last week, drawing support from confirmation Saudi Arabia and Russia would continue their additional voluntary oil output cuts.

In the Middle East, Israel has rebuffed growing calls for a ceasefire in Gaza, with military specialists saying that forces are set to intensify their operations against Palestinian Islamist group Hamas.

U.S. crude rose 1.73% to $81.90 per barrel and Brent was at $86.07, up 1.39% on the day.

(Reporting by Herbert Lash, additional reporting by Wayne Cole and Alun John; Editing by Nick Macfie, Will Dunham and Mark Potter)